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Energy Transfer Still a Favorite MLP |
We’ve been bullish on Energy Transfer (ET) for quite some time. Back in February, we gave the stock a 10/10 rating when the dividend yield was just above 7% with shares roughly the same price as they are today. Now, the dividend yield has grown to 9% and change. While interest in the name and Master Limited Partnerships (MLPs) have waned, we still love this stock. Here’s the case for our continued bullishness. Energy Transfer’s Business ET operates a portfolio of energy assets that include oil and natural gas pipelines, mainly in the energy hub of Houston/New Orleans.
As a MLP, Energy Transfer avoids corporate income taxes by paying out 90% of its profits directly to shareholders. Note: In a Roth or traditional individual retirement account (IRA), master limited partnership (MLP) income over $1,000 is considered unrelated business taxable income (UBTI) and is taxable. So, you will pay taxes on any income above $1,000 that the MLP earns annually.
Energy Transfer maintains a diversified stream of income within the energy segment, splitting its earnings fairly evenly amongst the five segments below:
With ~90% of the company’s earnings tied to fees, Energy Transfer is more about the volume rather than the price of the commodities it transports. Energy Transfer is also heavily invested in exports, with its Houston, Nederland, and Marcus Hook terminals, with total NGL capacity of more than 1.1 million barrels per day. It’s also worth noting that Energy Transfer is a serial acquirer, spending anywhere from $400 million to $1.5 billion annually for the last decade except for 2019 and 2020. The company‘s Dakota Pipeline is under review by the Army Corp of Engineers. Some analysts believe there is open liability here. However, we believe it’s merely speculation at this point. Financials
Source: Stock Analysis Energy Transfer’s stupendous growth is largely thanks to its acquisitions. Yet, the company has kept its long-term debt essentially flat since 2017, a testament to management’s prudent financial management. However, the total common shares outstanding has increased substantially, from 1.1 billion in 2017 to 3.1 billion today. There were a few acquisition-related causes:
The remainder came from convertible preferred shares. Valuation
Source: Seeking Alpha Despite the increase in share count, ET trades at a cheap valuation with a price-to-earnings (P/E) ratio lower than its peers except for Enterprise Product Partners (EPD). On a price-to-cash flow basis, it’s cheaper than all its peers except for Viper Energy (VNOM). All the other ratios, price-to-sales or EV-to-sales all point to ET as a cheaper investment than its peers. Growth
Source: Seeking Alpha You might assume the cheaper valuation is due to lower growth. However, ET has a three and five-year average revenue growth at or near the top of the list. Kinder Morgan (KMI), one of the largest and most popular MLPs, doesn’t come close to ET regarding revenue growth. And while it beats ET on EBITDA growth last year, it’s expected to contract on that measure this year, where ET is set to expand EBITDA. Profitability
Source: Seeking Alpha Gross margins vary wildly amongst the MLPs. However, ET’s EBIT margin is the lowest of the group. Yet, when it comes to free-cash-flow, it’s on par, though at the lower end of the group, where KMI and VNOM demonstrate far superior performance. Our Opinion 10/10 We love ET as a staple for a long-term portfolio. Management continues to manage its capital, acquiring where necessary and keeping debt in line. While the increase in share count could be seen as a problem, net income and cash flow have grown at a much faster rate. That’s been accretive for shareholders, and all we really care about. We don’t see any reason the dividend won’t be paid if not grow from here. But remember, MLPs have special tax situations you need to consider, especially for retirement accounts. |
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